Pricing your products or services sold is determined first by costing. Do you have any idea of what it costs to sell a sign or banner? For that matter, what does it cost to open the doors to your sign business each day? Pertinent questions that will influence your pricing.

By Mark E Battersby

It is the rare sign maker who doesn’t know whether his or her business is profitable. Accounting statements or even the sign operation’s tax returns provide that information. How many sign professionals know, however, whether their bids, jobs or even the types of services that they perform are profitable? Few sign makers in fact, are aware whether their ‘best’ customer or customers are generating profits sufficient to warrant the degree of services provided.

To answer these questions, and others, means understanding what things actually cost. For instance, do you have any idea of what it costs to sell a sign or banner? For that matter, what does it cost to open the doors to your sign business each day?

Often wrongly thought of as boring, time consuming and less than helpful to the owners and managers of small businesses, both the costing and budgeting process can have a significant impact on every sign shop’s bottom-line. At its most basic, costing asks a number of questions such as what does it cost to open the doors of your business each day, what does one sale cost, and so on. Costing makes the guesses of the budget process, educated ones.

Cost accounting
Cost accounting is best defined as a system for recording and reporting the cost of manufacturing goods, selling products and performing services. In other words, cost accounting gathers figures from all facets of the sign business and allocates them to a specific function of the operation.

The cost of having a salesperson on the street involves more than the basic salary and fringe benefits paid. There is also the cost of the vehicle driven, the operating costs for that vehicle, travel and entertainment expenses and, of course, a portion of the cost of the staff needed to support that salesperson and a portion of the sign business's overhead costs to provide the salesperson with office space or a place to meet customers. In this case, cost accounting involves gathering and allocating expenses from all facets of the business to the cost of sales.

In general, cost accounting includes methods for reorganizing, classifying, allocating, aggregating and reporting actual costs and, often, comparing them with standard costs. It can mean determining unit cost to make a particular type of sign or render a service. Cost accounting is an integral part of establishing a selling price or fees. Costing is indispensable for any sign business before reducing prices for a sale.

In financial accounting, the term “cost” is defined as a measurement, in monetary terms, of the amount of resources used for some purpose. In cost accounting, the term “cost” is used in many different ways. That is, there are different types of costs and they are used for different purposes.

The high cost of money
As is the case with many types of business expenses, the cost of money is often misunderstood. Many sign business owners believe, for instance, that using savings and investments to finance needed purchases or to keep the business going, is an economical strategy.

Unfortunately, there is even a ‘cost’ to money. Removing funds from savings incurs a so-called “lost opportunity” cost. If those funds had remained invested or kept in a savings account, they would have earned interest or increased in value. Using them in the business means that the business should consider that “lost opportunity” cost as a legitimate cost of doing business.

A sign business offering a “prompt payment” discount also incurs a ‘cost.’ The business must usually pay workers and its bills before it receives payment for the services rendered. Often, this means borrowing money. It is up to the operators of the sign business to decide whether it is more economical to borrow the money necessary to keep the operation going or to offer their customers an incentive for paying early.

As an alternative, a small sign operation - or any size business -- could increase the amount it charges sufficiently to cover the amount of the discount. Thus, if not taken advantage of by the customer, that discount becomes a charge for the use of the sign operation’s money. Of course, these scenarios assume that the business owners or managers are aware that money “costs.”

Allocate and profit
Cost accounting can be as simple or as complex as desired. However, just as with the cost of money, it should never be ignored. How, after all, can profitable bids be prepared, discounts offered or prices and fees be decided if the operation’s expenses aren’t reflected accurately?

As mentioned, cost accounting involves allocating all of the sign operation’s costs associated with generating a sale, performing a service, etc., both direct and indirect. Direct costs include such things as the total wages paid workers, supervisors’ salaries, supplies expended, etc. Indirect costs are all of the other expenses associated with keeping the operation going.

Accounting for costs, reducing costs
Obviously, there’s more to cost accounting then determining the cost of a job or service performed. Every sign business owner should also carefully analyze their costs of doing business to locate and reduce those expenses that are out-of-line.
Many sign professionals begin by comparing this month's expense figures with last month’s or with the same month last year. Eventually, year-to-date expenses are compared with last year-to-date figures. Then an attempt is usually made to determine the reason or reasons for any discrepancies between the figures in different accounting periods and, perhaps, fix the blame for costs that have increased.

If, for example, supplies expenses represented two percent of sales last year and shot up to fifteen percent this year, you should want to know the reason. Equally important, that analysis also provides a real insight into the fiscal health of the sign business. The sign business's financial health has its bearing on much more than the bottom-line or profits. It can also affect both the cost and the availability of financing.

Establish a system, create a goal
To set up an effective cost accounting system, the help of an accountant or CPA might be advisable. Cost accounting, after all, can get fairly complicated. The money spent for professional guidance will be well worth it.

Naturally, before the sign professional can improve the operation's efficiency, particularly in the area of its non-revenue generating services, they must first be able to identify what specific support activities the operation is performing, describe in detail how it is performing those activities and establish how much the operation is spending on those activities.

Conventional cost accounting, such as that employed by many software programs, usually places support costs into a pool that is distributed across the operation’s cost centers or service. This can distort actual costs as illustrated by a job that requires ten estimates and ten sales calls before finally winning the job. This job is usually assigned the same support cost as a job that didn't require any estimate or sales calls.

Variable, fixed, and mixed
From a planning and control standpoint, one of the most important ways to classify costs is by how they behave in accordance with changes in increased sales, extended hours of operation or another measure of activity. Thus, most costs can be classified as “variable”, ”fixed” or “mixed” costs.

Variable costs vary in direct proportion to changes in activity. In other words, utility costs vary depending upon the hours during which the business premises remain open. Other variable costs are materials used by a factory or gasoline expenses based on the mileage driven.

Mixed (or semi-variable) costs vary with changes in volume but, unlike variable costs, do not vary in direct proportion to those changes. In other words, these costs contain both a variable component and a fixed component. Examples are the rental of a delivery truck, when a fixed rental fee plus a variable charge based on mileage is made and power costs, where the expense consists of a fixed amount plus a variable charge based on consumption.

Taking control
Taking financial control of your sign business means knowing and understanding the cost of money. It also means accounting for costs in order to understand what each sale, product, service, contract, job ­ or customer - actually costs. Every sign business owner should carefully analyze their costs of doing business not only to locate and reduce expenses that are out-of-line, but also in order to keep the operation on a profitable path.

Accounting for costs means more realistically pricing the signs created and produced, and the products sold or services rendered in such a way as to enable those costs to be passed on to the customer. Cost accounting can also prove invaluable when it comes to determining actual profits, finding out what a particular job actually cost or, if detailed enough, cost accounting can reveal what your “best customer” actually cost you and your sign business.